- Recent Developments
- March 6, 2012 | Authors: Michael W. Durham; Diara M. Holmes; Marcus S. Owens; Douglas N. Varley
- Law Firm: Caplin & Drysdale, Chartered - Washington Office
We would like to report several recent developments of note to tax-exempt organizations.
Democratic Senators Urge IRS to Investigate the Use of Section 501(c)(4) Organizations
In a letter dated February 16, 2012, seven democratic Senators wrote to IRS Commissioner Shulman and requested an investigation into the use of section 501(c)(4) "social welfare" organizations to improperly engage in campaign activity. The Senators stated:
It is contrary to the letter and the spirit of the statute for political organizations formed primarily to advocate for a political candidate or to run attack ads against other candidates to take advantage of section 501(c)(4).... We urge you to protect legitimate section 501(c)(4) entities by preventing non-conforming organizations that are focused on federal election activities from abusing the tax code.
The letter does not specifically target any nonprofit organization for investigation. It follows a recent trend of public comments arguing that more than an insubstantial amount of political intervention may be impermissible for section 501(c)(4) organizations, although it acknowledges that current IRS guidance allows such activity so long as it is not an organization's primary activity. The IRS has not commented on the status of any current or intended investigations of section 501(c)(4) organizations with regard to their political activities, but the 2012 EO Work Plan states that issuing a compliance questionnaire to 501(c)(4), (c)(5), and (c)(6) organizations is a goal for the current fiscal year.
2012 EO Work Plan Highlights
The IRS' Exempt Organizations Division recently released its long-awaited FY 2012 Work Plan and FY 2011 Annual Report, which reports accomplishments from the past fiscal year and sets forth the Division's priorities for the fiscal year that began in October of 2011. The 2012 Work Plan describes EO's plans for several ongoing projects and highlights new areas of focus, including:
- Continuing to examine organizations with international activities, particularly private foundations with revenues in excess of $500 million;
- Issuing a questionnaire to a cross-section of group ruling holders to gain information on how central organizations meet the requirements of Rev. Proc. 80-27 in the oversight of group members;
- Completing the Colleges and Universities audit project and issuing the final report;
- Conducting the third and final stage of the National Research Program on employment tax matters including the examination of an additional randomly selected organizations;
- Conducting a compliance check of organizations described in sections 501(c)(4), (5), and (6);
- Commencing a new UBIT project focusing on organizations that report significant gross receipts from unrelated business activities but do not file Form 990-T;
- Continuing efforts to address the requirements imposed by the Affordable Care Act; and
- Continuing to resolve issues raised by the automatic revocation process.
Driscoll Reversed: "A Home" Means One Home
Earlier this month the Eleventh Circuit, in a per curiam opinion, reversed the Tax Court's decision, Driscoll v. Commissioner, 135 T.C. 557 (2010). In that case, a divided Tax Court had held that the Driscolls were entitled to exclude from their income parsonage allowances paid for both their primary residence and their lake house. The operative language of section 107 allows ministers to exclude from income certain amounts used to "provide a home." The Tax Court held that amounts used to provide the lake house, like amounts used to provide the Driscoll's primary residence, were used to provide "a home," thus allowing the exclusion to apply tomultiple homes. This decision has caused considerable controversy about the proper scope of the parsonage allowance.
In reversing the Tax Court, the Eleventh Circuit cited to dictionary definitions and the relevant legislative history and held that in this context "a home" refers to a singular home. The court allowed the Driscoll's the exclusion for the allowance related to their primary residence but denied the exclusion for the amount associated with the couple's lake house.
Although this appears to foreclose the issue in the Eleventh Circuit, it remains to be seen whether the Tax Court will revise its original position based on the Eleventh Circuit's reasoning (it is not obliged to do for challenges arising outside of the Eleventh Circuit). If the Tax Court maintains its position, the IRS will presumably continue to appeal exclusions of multiple homes in other circuits as well.
Compliance Checks for Automatically Revoked Organizations
An IRS official announced that the Service will be issuing 403(b) plan compliance check letters to exempt organizations that have been automatically revoked for failing to file information returns. If a 403(b) plan sponsor has been automatically revoked the plan may have an eligibility failure. The compliance check is only seeking information regarding this potential eligibility failure.
For organizations that may have an eligibility failure, the IRS has provided guidance on how to correct an eligibility failure caused by automatic revocation.